Banks pass Fed's annual stress tests; Capital plans expected out Friday

Investing.com -- The Federal Reserve said banks passed their annual stress tests, demonstrating they are able to weather a severe recession.

The regulator said all 23 banks tested remained above their minimum capital requirements during the hypothetical scenario it tested, despite total projected losses of $541 billion. 

Under the conditions it tested, the aggregate common equity risk-based capital ratio—which provides a cushion against losses—was projected to drop by 2.3 percentage points, the Fed said, to a minimum of 10.1%.

"Today's results confirm that the banking system remains strong and resilient," said Fed Vice Chair for Supervision Michael S. Barr. "At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses."

The results are just the first of a few regulatory moves that will affect the amount of capital banks are required to hold.

Banks were expected to easily pass the tests, which are designed to measure the resiliency of the financial system to unforeseen shocks. This year’s hypothetical scenario included 10% unemployment, a 40% plunge in commercial real estate prices, and a surge in the dollar.

For the first time, the Fed tested an exploratory market shock on the trading books of the largest banks, including greater inflationary pressures and rising interest rates. The results of that test aren’t part of bank capital requirements but “was used to further understand the risks with their trading activities and to assess the potential for testing banks against multiple scenarios in the future,” the Fed said.

In past years, the release of the results was quickly followed by announcements from major banks about their stock buyback and dividend plans. But this year the plans may be affected by changes to capital rules that regulators are still contemplating. 

Banks are expected to wait until after the market closes on Friday to announce their capital plans.